Tricky Start for Traders With Debt Ceiling Uncertainty & Mixed Fed Signals

It was an uncertain start to the week for markets yesterday, reflected in lacklustre price action as traders awaited fresh directional cues. US debt ceiling talks yesterday were reportedly positive though, again, no resolution has been agreed yet. Both sides of the isle in Washington DC expressed confidence that a deal can be done, however, with President Biden saying in a statement that a default is off the table.

Following on from dovish comments from Fed chairman Powell last week, the Fed’s Bullard was decidedly more hawkish yesterday, calling on the need for two further hikes this year. Minneapolised Fed Governor Kashkari said a June hike was more of a close call for him. What is clear from recent Fed commentary is that division looks to be growing among policymakers, which will make it a harder job for traders calling likely outcomes ahead of forthcoming meetings.

Key Factors for Today

• Debt ceiling uncertainty remains
• USD higher on safe-haven demand
• PMIs the main data focus for US, UK and EZ

Market Movers

• Nikkei drops 1.5% from highs
• S&P and Nasdaq turn lower
• USD pushing higher
• XAUUSD drops back under $1970

Econ Calendar

• Eurozone PMIs (9am)
• UK PMIs (9.30am)
• US PMIs (2.45pm)

ECB’s Lagarde Says More Tightening Needed

On the back of hawkish comments from ECB chief Lagarde over the weekend we heard some interesting follow up commentary yesterday from ECB’s de Coz. Considered to be one of the more dovish among the ECB rank, de Coz was seen backing further monetary tightening from the bank this year while citing the need to keep rates at restrictive levels for longer in order to bring inflation down to target.

The big news from the equities space is the sharp pullback we’ve seen in the Nikkei today. On the back of a solid 10% rally off the May lows, the Nikkei has fallen by over 1.5% today, likely driven by a higher-than-expected BOJ core CPI reading for last month. US stocks have been seen treading water this week with both the Nasdaq and the S&P falling back from initial highs to sit within Monday’s range.

Looking at today’s data schedule, a slew of PMI readings for the US, UK and Eurozone will be the main focus. In terms of forecasts, the market is projecting a slight weakening across the board which, if seen, will no doubt put fresh focus on global recession fears, leading equities prices lower near term.

In FX, the US Dollar is finding its feet again today, likely driven by safe-haven demand alongside a spike in short term Treasury yields as US debt ceiling negotiations continue without resolution. Despite positive sentiment from both sides, traders are cautious as we inch towards the deadline. Furthermore, hawkish Fed comments yesterday have kept the prospect of a June hike alive with market pricing moving up to around 25% from around 17% prior.